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us stock market, trade stock
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2/04/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Today QCOM hit our target stock price (41.50) on the put play as it fell from our original buys at 50 and 51.50. We sent out the alert that the target was hit and closed them out. Not a bad trade.
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Backdoor earnings fears via accounting issues lead to market drop.
- Indexes hammered as big stocks suffer on higher volume.
- Market: Appears deeper test is on for now.
- Subscriber Questions
- Team Trades
Renewed fears lead to selling on the indexes.
Out of the gates further issues regarding accounting were swirling. TYC was on the burner again, and a Wall Street Journal story questioned AMZN's numbers. ETS announced an SEC investigation while ELN continued to flounder in accounting and earnings worries. The market opened lower and never really tried to mount a rally to recover the lost ground. It was a weak day, finishing off at the lows.
While the individual accounting stories are taking heavy tolls on certain stocks, the entire market is using this as a reason to sell. The market is also looking at another issue related to the outcome from the ENE and other accounting issues: even if a company has 'clean' books, we can expect unusually high internal scrutiny by the officers and company boards to insure that results are reported properly.
What does that mean? It means numbers are going to be conservative. That may mean that we don't see as rapid an expansion in earnings as had been hoped. Let's face it, there was a lot of pressure to continue to produce not only positive growth, but growth that matched or exceeded continually rising expectations. The cost of a miss? With stocks fully pricing in the expected earnings increase, companies were walking on a razor blade; one miss and the stock prices were cut to ribbons. The pressure led to 'aggressive' accounting choices that erred on the side of increased earnings as opposed to more conservative calculations.
Now that the fear of accounting scandal is just as or more powerful than simply missing earnings, companies will be careful to go by the book. As the generous accounting gives way, the rate of earnings growth as the economy emerges from recession will in most cases be slower than original views. Investors know this and that is one key reason the overall market is selling. It is not a 'who is next' mentality as much as it is a realization that all numbers might be pared back even though they show improvement.
Combine that with the overall concern that earnings won't rise as fast as anticipated because the recovery might not be as strong as originally hoped, and you have a recipe (or at least an excuse) for more selling.
Indexes pounded lower on increased volume with the big names leading the way.
One possibility this week was a follow through to last Wednesday's intraday reversal on high volume. Instead of a 1.5%+ price gain on the indexes on higher volume with a 2:1 or better A/D line, there were 2%+ price declines on higher volume with decliners leading better than 2:1. About all you can say for the session was that it was not a total breakdown to new post-rally lows. Looks to be heading that way, however.
Good news in the form of upgrades in the semiconductor equipment sector from Goldman and Soundview helped stem that sector's losses on the session (the SOX was the strongest of the big indexes), but they could not stave off other tech selling. Hewlett Packard announced that its Q1 results would be 'substantially above' estimates and that consumer technology consumption was showing strength. The was HWP's second increased guidance in as many quarters. Further, Dell affirmed its Q4 again. These could not forestall selling either. Just as the market wants to buy at times and overlooks negatives when it does, it is now wanting to sell and overlooks positives in doing so.
The biggest losers were the bigger names. The smaller stocks making up the bulk of our reports (except for the puts) held up surprisingly well. For many of the retailers, restaurants, small software, business services and internet stocks, there was a bit of selling action, but it was small and on light volume. Basically, the smaller stocks in good patterns just appear to be taking some rest while the rest of the market beats itself up.
THE MARKET
The indexes wasted no time today selling lower. None of them undercut last Wednesday's intraday low on the close (though the Nasdaq did so intraday), but they all closed below the nearer term support levels. The ice was broken last Wednesday, and that made downside move easier after running into overhead resistance once again late last week. Volume was higher and strong again on the NYSE; it was up again on the Nasdaq, but not nearly the same as the NYSE increase. The quick turn back to levels tested just last Wednesday indicates the indexes are ready to test lower again. We did not close many put positions based on today's action.
VIX: 26.85; +3.98. A big jump higher, the third largest gain since the week the market re-opened last September. A big jump, but not nearly at a level that would warrant a call that the market is sold out. It needs to climb back over 30 with some authority.
VXN: 45.84; +2.76. Not as large a gain percentage or otherwise as the VIX. Interesting. It is another indication that the Nasdaq is simply not as active, i.e., speculative, than the NYSE. Still nowhere near high enough to consider a reversal; just one day's action after all.
Put/Call Ratio (CBOE): 0.98; +0.23. Another big jump in the put/call ratio, showing that for every 100 calls traded, 98 puts traded. Closes above 1.0 mean more put buyers than call buyers. That is considered extreme (natural bullishess of investors). We have already had one close over 1.0 last Wednesday. Another one or two can set the stage for the bottom of the test, particularly if volatility shoots up with it.
Nasdaq
As usual, took the brunt of the selling percentage-wise, but volume was comparatively lighter than the NYSE trade. Still, it undercut the 1875 closing support, and it looks ready for a further test of the September bottom.
Stats: -55.71 points (-2.9%) to close at 1855.53.
Volume: 1.779 billion (+4%). Trade remained still just below average though it did increase on the session. Distribution was underway, but volume is still light compared to the NYSE.
Up volume: 257 million
Down volume: 1.506 billion. Down volume again over 1 billion shares and surging.
A/D and Hi/Lo: Declining issues stomped advancers 2.75 to 1 (1.28 to 1 Friday). It was a route in every since of the word.
New highs: 78 (-47)
New lows: 69 (+41)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Started weak, and the first rally failed about 15 minutes into the session. It was all over from there. On the low (1849.13) it undercut last Wednesday's low (1851.49), but this time there was no reversal. A meager 5 point gain in the last 20 minutes kept the close above Wednesday's intraday low, but that hardly means buyers were flooding back in looking for values. The close below 1875 was significant; it was the first time since November. That sets up a further drop toward 1800, but we would expect a drop near the 1750 range, the first point where the Nasdaq gapped up in November and roughly a 50% retracement.
Dow/NYSE
Friday it ran right up to resistance as volume declined, and today it collapsed lower. Still above the recent closing low, but the failure once again at resistance on higher volume is another sign of the continued distribution in the NYSE. Hard for the market to regain its feet with continued distribution, particularly so close after the rally attempt last week.
Stats: -220.17 (-2.2%) to close at 9687.09.
NYSE Volume: 1.421 billion (+2.4%). Not as big a percentage gain as the Nasdaq, but well above average on the selling. Another distribution day, dumping of shares.
Up volume: 184 million
Down volume: 1.249 billion. We have not seen such a lopsided tally in a long time.
A/D and Hi/Lo: NYSE decliners did not outshine Nasdaq decliners, but they were strong at 2.35 to 1. This is a continuation of last week's days where decliners led advancers at 2:1 or better. Still, Thursday saw advancers lead 2.1 to 1. Very choppy, but a down bias in the A/D line.
New highs: 103 (-33)
New lows: 55 (+28). Back up over 50, a key level.
The Chart: http://www.investmenthouse.com/cd/$indu.html
As with the Nasdaq, the Dow never made an attempt to rally. Each rally attempt was turned south, making a series of lower highs and lower lows. It closed below 9691, the point marking the bottom of the November to January trading range. That opens the door to another shot at 9500, a level that held intraday Wednesday. The Dow is still relatively close to the post-September high, and a 50% retracement would put in near 9100. Again, not all indexes have to make a full test; one can lead the others down and turn at its 50% move, or it can continue lower and then one of the other indexes can check up at that point and turn the market. For now it looks as if a test of 9500 is coming. How it handles that level will tell us more about how soon or if it is going to 9100.
S&P 500: The big caps sliced below 1100 on the close, the lowest close since early November as it rallied higher. It held above last Wednesday's 1081 intraday low, but as it closed on its low today, it never had the chance to really test that level today. With the rising NYSE volume it appears that the big caps are going to do that and more, possibly down to the 1060 level where there is some support and where a 50% retracement of the rally off of the September bottom. Right now the bias is lower.
Stats: -27.76 points (-2.5%) to close at 1094.44.
Volume: NYSE volume remained above average and moved higher on the session. 1.421 billion (+2.4%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The bias is certainly downward. Even good news from upgrades and company's upping earnings guidance could not deter the sellers. Tomorrow's ISM Service index and Factory orders may not stop the selling either even if they are solid. Again, where in the rally investors were pricing in better times, now there is a concern that the recovery may not be as strong and that earnings will be kept under tight lead for Q1 reports. That may not provide for as large of earnings growth as originally hoped for, and the market is taking that out of stock prices. Again, the lack of a stimulus package to goose the economy has come back to hurt stocks. It is not 100% of the blame, but a large part as stocks had priced in a good recovery and a stimulus package was one of the reasons. Without it, the recovery is anticipated to be blander, somewhat of a sister kiss.
Thus we may get an early test of the support levels once again broken today, but we anticipate more downside action. Given the predominance of distribution sessions over accumulation sessions the past 3 weeks, the bias is geared toward more selling. As it does not appear any economic news on the horizon will be of the caliber to convince investors that earnings will be above expectations, in order to entice buyers, stocks will have to sell down further to remove some of those gains that were priced in as part of that stronger economic recovery. Once that is done then some good news will have a positive effect on share prices. Until then, after any test of the recent support, we look for the downside to continue toward the retracement levels cited in the 'support and resistance' table.
Support and Resistance
Nasdaq: Closed at 1855.53.
Resistance: 1875 to 1900 is the bottom of the November consolidation. Then 1934 to 1941 represents the top of the November consolidation range. The 200 day MVA (1939.29) and the 50 day MVA (1933.52) are right at this consolidation level, making it the more difficult. After that we look at the simple 50 day MVA (1964.81) that stopped the index in late December.
Support: 1850 held intraday last Wednesday. Below that would be 1800, and 1750 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1094.44.
Resistance: 1100 could try to stop it on the way back up. Then there are the price consolidations at 1125, and the 50 day MVA (1132.75). 1150 is after that, with the simple 50 day MVA (1141.24) right below that.
Support: A range of support from 1075 to 1050, the 1050 level holding twice in October. That is right at the 50% retracement (1060).
Dow: Closed at 9687.09.
Resistance: 9691 to 9750 represent the bottom of the November, December and January range. The 50 day MVA (9857.77); the simple 50 day MVA (9932.69). Right behind that is 9992 to 10,000. Then the 200 day MVA (10,101.86). The January high at 10,300 level is last.
Support: 9500 is the next level, and it held on last Wednesday's intraday selloff. After 9500 there is a very congested trading range from 9125 to 9500. A 50% retracement is 9181.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
2-04-02
Auto Sales, January (time not supplied): 6.0M versus 5.2M prior.
Truck Sales, January (time not supplied): 6.8M versus 7.8M prior.
2-05-02
ISM Services, January (10:00): 51.8 versus 54.2 prior.
Factory Orders, December (10:00): 1.0% versus -3.3% prior.
2-06-02
Productivity-Prel., Q4 (8:30): 3.0% versus 1.1% prior.
2-07-02
Initial Claims, 2/2 (8:30): 395K versus 390K prior.
Consumer Credit, December (15:00): $9.0B verusus $19.9B prior.
2-08-02
Wholesale Inventories, December (10:00): -0.5% versus -1.1% prior.
SUBSCRIBER QUESTIONS
Q: I would like to know when do you know what the breakout point is, and at what point do you buy.
A: When we refer to a breakout, we are talking about a stock price exceeding a certain level within a chart pattern. The pivot point is another term for the breakout point. That is the point we want to buy.
When a stock forms a technical pattern such as a cup, it "breaks out" of the pattern when it exceeds the prior high. The "pivot point" is the buy point, and it is $0.10 above the former high. The reason the pivot is $0.10 higher is because the former high serves as resistance, and we need to see that the stock price clears that former level before we buy into it. Now, we prefer cups that form handles before they breakout. That is when, before it reaches the former high before it started its correction, it pulls gradually back in a flat, slightly declining consolidation on low volume. This action 'shakes out' weak holders who bought near the former pattern high and are just looking to get out as close to even as they can. They see it approach the old high, fail to take it out, and then start to fade again. They want out. When a pattern forms a handle, the pivot point is $0.10 above the high in the handle (the intraday high, not the closing high).
With a double bottom pattern, the pivot point is $0.10 above the center of the pattern. Double bottoms can also form handles, and the rule for handles as set forth above applies. For other patterns, such as ascending wedges, we stick with the pivot point being $0.10 above the former high in the pattern.
Volume is a key factor in breakouts. In a breakout from a cup with handle or double bottom with handle, we look for volume of 1.5 times the daily average. For an ascending wedge, as a rule of thumb we can make the play with volume of 1.35 times the average volume.
TEAM TRADES
VIA: A stock on the Technical Traders Report that we were eyeing for downside action. The stock started out with the rest of the market: heading lower. It went through our buy point (38), but we were going to see if it tested that level, not jumping on too quick as the early drop may try to reverse. Sure enough it turned from 37.50 and rallied back to 38.35 by 9:50. It could not retake the session high, however, something we look for in our put plays. When it went back through 38 right at 10:00 CT, that was what we were looking for. We issued the alert on the stock and went after it. We were looking at a variety of options from May 50's to March 45's. The May puts had little action and we liked the longer time period, but the March options were showing a better delta and better volume and there is a month and one-half to expiration. We snuck in an order just as the stock started back up; we did not get the benefit of the move, however, as the market maker was quick to fill us and then dropped the price. Oh well, perfect timing is never possible. Anyway, the stock made a lower high and then fell to 37.70, and traded sideways in a range of about 30 cents for three hours. Then with an hour and one-half to go it rolled over and really started to fall, landing at 36.93 on the close.
THE PLAYS:
Good movers: ORI broke out again on strong volume, after testing the breakout from its ascending wedge. ACDO made its move on a strong earnings report, and puts like EMLX, CCMP, VIA and JPM were looking good today despite some lower volume.
Targets hit: QCOM (put, 41.50)
Trailing Stops: ALOY (19.05)
Stocks that were removed to a watchlist over the weekend and holding up well:
GRTS ($22.75; 0.00): Trying to form an ascending wedge above the 18 day MVA (but has a dip down to the 50 day MVA from last week). Volume is really shaking out to low levels and the stock bounced slightly from support even so. New positions for stock on a breakout over 23.50 on strong and rising volume.
STK ($24.24; -0.20): Showed a tight doji on lower, below average volume after pulling off the ascending wedge breakout high of 24.99 on Thursday. Looks good in the pullback, though can test just a bit lower (to 24 or the buy point at 23.50). New positions for stock and/or March $22.50 calls to buy over 25 on strong and rising volume.
VVTV (18.22; +0.07): Closed right on the 50 day MVA, showing hammer doji on lower volume. We were looking for a move up from this support (the stock closed just below that level on Friday), and may get it. Buy point is over the 18 day MVA (19.30) for positions with stock and/or March $15 calls to buy.
Puts:
CELG (25.83; -2.33): Started selling again today; still has not moved below the original buy point (25.35) but stronger volume can send it through that back down to the January low at 22.65.
NDC (32.51; -0.71): Could not hold the 50/200 day MVAs today, moving back below but holding above potential support (50 day MVA simple). Volume sharply lower and well below average so may hold at least for time being, but the stock is weak, unable to break the down trendline up at the 33.50 range. Buy point was 32.
JEC ($62.74; -1.49): Broke the 18 day MVA and now holding at the 62.50 level at support. Hit the original buy point (62.40) 4 days ago.
End Part 1 of 2
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